EKIP– Expert Club for Economics and Politics A Different Opinion
The thesis that economic bubbles are an inevitable creation of the market continues to be somehow promoted in the public sphere; that they are fueled by psychological factors, by the herd behavior of profit-hungry investors. Even more disturbing is the claim that a bubble can only be recognized when it bursts.
Dimo Stefanov
If you are familiar with the business cycle theory, first put together by Austrian professor Ludwig von Mises[i], there is nothing mystical about these "animal spirits[ii]" swirling around before and during a crisis. It is not supernatural forces that cause investors to make so many wrong decisions, but completely objective and explainable factors.
The key can be found in interest rates and the influence of central banks on them.
Interest rates in the economy are not something that can be planned, modeled, and changed lightly, without consequences. They are the result, not the cause, of human action. In short, interest rates in the economy indicate two very important things:
- First, they are the result of consumers' preferences to substitute present for future goods. The less we consume now, the more savings we have. This increases investment and in the long run the economy becomes more productive. Accordingly, real incomes grow.
-Second, interest rates also contain a risk component, which indicates how entrepreneurs assess the chances of profits from new investments.
When central banks artificially lower interest rates, whether by buying up assets, most often government securities (in the case of the Federal Reserve), or by issuing loans backed by overvalued government securities (in the case of the ECB), the result is the same. Entrepreneurs are tricked into investing in long-term projects that would never have started without the new money and low interest rates.
The good times come, the inflation of the bubble, the so-called boom. Everyone is happy, consumption increases, investments increase, what's more, there is no inflation (or at least that's what the infallible CPI tells us). But there is no free lunch in the economy. It turns out that there are not enough resources to maintain the capital structure so that it meets the desires of consumers, to consume now.
The bubble bursts, the economy falls into recession, and a depression follows. Some projects are abandoned completely, while others are partially salvageable because they meet consumer demand. Although many call this period a depression, it is actually a time when resources are put to work where they are most useful. Of course, the bigger the boom, the longer the recovery period.
This explains the herd behavior of investors and their ex post[iii] irrational behavior. There is nothing inexplicable, nothing hidden, except for the central bankers and regulators. They play the role of the thief who shouts: “Catch the thief!” It is the innate ability of the market to self-destruct that is blamed. As we have seen, nothing of the kind happens.
As a result, more regulations and (worse) more new money appear to save the economy. But these are the same funds that brought it to its knees. This of course creates the wrong incentives and wrong signals in the system. The so-called moral hazard is growing. Why should I take care of my investment portfolio when the state will take care of it? And last but not least, the foundations of a new unhealthy boom have been laid. Regulations are more PR for the robbed people than a working measure. Even if BASEL 2020 were to be invented, with this loose monetary policy, with this stimulated moral hazard, the result is zero. Or to use medical jargon - we are treating the symptoms, not the disease.
The graph below is telling. The gray vertical lines are the dot-com bust of 2001 and the subprime mortgage crisis of 2008.
In both cases, as the following chart shows, the Federal Reserve dealt with the crisis by lowering interest rates, while increasing the monetary base. The next crisis is more protracted. The Fed has doubled its monetary base twice since the beginning of the problems! And although most critics point out that there is no inflation in the CPI and therefore nothing to fear, it is good to be aware that the market is a complex phenomenon in which many processes are developing simultaneously. The moment the banks stop withholding liquidity, we will begin to boldly climb to new depths.
The actual claim being thrown into the public domain is the following:
"Here we left the banks without regulations and look where we got them! Regulations are needed and this is it!"
The above statement is supported by both ordinary people and economists.
The last statement is very interesting because the banking system is a highly regulated system. There are laws on what banks should do, as well as a central regulatory body - the central bank. It is ridiculous to claim that the system has been left unregulated even just because of what central banks are doing, namely that they are currently regulating (injecting money and saving banks). They did the same before the crisis. And despite the above facts (these are facts), it continues to be claimed that the system is not regulated and that is why it has failed.
It is clear why the above statement works for the average person - he does not understand anything about banking systems and simply accepts what they say in the newspapers. What is more interesting is that this statement works for professional economists too! In my opinion, the reason is that in economic education at universities, only the modern fractional reserve system is taught. De facto, there is no alternative to it in the minds of current, university-trained economists. And since there is no such alternative, the only thing left is to regulate the existing system. Perhaps some of them understand that regulation will not fix things, but within the limited framework of their thinking there is no other solution. As far as I have talked to economists and people who understand economics, the concept of a "full reserve banking system" does not exist for them. Let alone that they can imagine a system without a central bank.
In short: to manipulate a person, it is enough to limit their thinking within certain limits.
@EU
"What is more interesting is that this statement also works for professional economists! In my opinion, the reason is that in economic education at universities, only the modern fractional reserve system is taught. De facto, there is no alternative to it in the minds of current university-trained economists."
It is impossible to change the system in a normal, evolutionary, and market-based way.
Changing the system with partial reserve can only be done in two ways:
- with a political decision - a kind of regulation again
- in the event of a cataclysm - for example, a revolution
The first way (political solution) is also impossible. The world is ruled by politicians, and politicians by bankers. For the bankers themselves, a “full reserve banking system” is a restriction and regulation. The current system is perfect for them and it is absurd to think that they will change it and limit themselves.
Since most economists are still engaged in science, not mysticism or religion, and are not followers of Che or other revolutionary icons, a "full reserve banking system" does not exist for them.
@Toto5
"It is impossible to change the system in a normal, evolutionary, market-based way."
Yes, it is impossible to change in a market way and the reason is that it is not marketable. If it were marketable, then it could develop on its own and become more optimal.
Example: If you allow a full-reserve bank to exist among fractional-reserve banks, it can bankrupt them all. The fractional-reserve system is cheap, unstable, but highly leveraged and guarantees big profits (at the expense of other firms).
For the evolutionary way: it could. The tendency is for unstable systems (such as the one with partial reserve) to fail and be replaced by something more stable.
"For the bankers themselves, a 'full reserve banking system' is a restriction and a regulation. The current system is perfect for them and it is absurd to think that they will change it and restrict themselves."
Currently, the fractional reserve banking system guarantees the profits of banks. It puts them in a privileged position relative to other participants in the economy. A kind of top of the food chain. No one lets the good things go alone. The lack of regulation of banks would simply turn them into companies absolutely equal to others with equal profits.
"in the event of a cataclysm – for example, a revolution"
A probable cataclysm is the offshoot of the system. They are currently keeping it on command breathing.
"Since most economists are still engaged in science, not mysticism or religion, and are not followers of Che or other revolutionary icons, a "full reserve banking system" does not exist for them."
I disagree here. Yes, economists think they are dealing with science, but in practice they are dealing with a mixture of ideology and science. There are certain postulates that are not touched and questioned. And it does not matter at all that they do not correspond to reality. They pretend to use scientific methods (from the exact sciences), but when the results are not presented to them, they simply ignore them.
I have already given you an example with the portfolio theory: If you give it to a mathematician and explain to him what assumptions it is based on, he will laugh at it and reject it. However, we are in the field of economics, and there things are based on ideology and such attempts are resolutely rejected.
Another example: People used to be rational. Other theories come from there. Well, but people are not always rational. I would say they are partially rational. There is already a lot of empirical psychological evidence for this, and it cannot be dismissed. Has anyone questioned the related economic theories? No. That would contradict established beliefs.
More examples: Inflation is necessary for the economy to grow (belief). However, in the 19th century there were long deflationary periods of GROWTH. A normal person, based on the principles of the exact sciences, when he sees that theory and practice diverge, would reject the theoretical statement as wrong or at least incomplete. And this happens all the time in physics, chemistry, mathematics and in the exact sciences in general. However, not in economics. There we have beliefs and it is very dangerous to shake the house because it can collapse.
If economists only dealt with science, we wouldn't be in this position now.
@EE
"If you allow a full-reserve bank to exist among fractional-reserve banks, it can bankrupt them all."
There is no need for a permit, as there is no restriction. There are only restrictions/regulations on the lower limit of reserves.
"The lack of regulation of banks would simply turn them into companies absolutely equal to others with equal profits."
The lack of regulations, according to bankers, means they can operate with zero reserves.
Privileges are not easily given up. You cannot save the world from regulations by new regulations, and the introduction of a "full reserve banking system" can only be done with new regulations and restrictions. However, this cannot happen, because it is like waiting for the feudal lords to limit their privileges and change the system themselves.
@Toto5
"There is no need for a permit, as there is no limit. There are only restrictions/regulations on the lower limit of reserves."
I don't know much about the issue, but some time ago G. Angelov mentioned that full-reserve systems are banned in the European Union. However, I may not have understood it.
If you are allowed to be a bank (permitted by BNB authorities), then you have the benefit of using fractional reserves. Who is running away from profits?
The point is that if you operate with full reserves, then flows of money will flow to you from other banks and you will de facto drain their reserves. This leads to their bankruptcy.
By the way, you don't just start a bank. There are capital requirements, etc. and one most important requirement: "The BNB must decide that you do not threaten the stability of the banking system." The last requirement gives the BNB carte blanche to let in and stop whoever it wants.
By the way, the most important regulation that makes the banking system of this type possible at all is the requirement for payments in Bulgarian levs. Imagine a bank that operates with money covered 100% with gold. The chance of other banks surviving in such competition is exactly zero. In short: competition in money is not allowed. And money can only be created and distributed by the BNB and the banking system adjacent to it.
"The lack of regulations, according to bankers, is if they can operate with zero reserves."
There cannot be a bank in modern times that operates with zero reserves. Any bank that reduces its reserves increases its risk of bankruptcy from bearable to almost 100%. It is precisely to reduce this risk that the Central Bank and the Deposit Protection Fund exist.
And the more unregulated the market, the more bankers cannot afford to operate with fractional reserves. And in a free market (according to the Austrian understanding, not according to the popular and accepted one of Marx) fractional reserves cannot exist.
"and the introduction of a "full reserve banking system" can only be achieved with new regulation and the imposition of restrictions."
That it's possible, that it could happen, but it's bad, and as you say, it won't happen "because it's like waiting for the feudal lords to limit their privileges and change the system themselves."
However, in the absence of regulation (in the Austrian sense), the full reserve system will prevail on the simple principle of competition. This is not possible at the moment.
That is, new regulations are not needed to self-impose the full reserve, but the removal of all current ones. The latter, however, has enormous political and social consequences for the organization of society.
By the way, I'm not entirely sure if you know exactly what a full reserve is. In short:
Time deposits are not covered and are lent out as the bank decides. They do not need to be covered by money (as is the case at the moment) because they are not callable until maturity. That is, there is no newly created money here.
Demand deposits/current accounts are 100% covered by money. That is, with them the bank sells a service for which you pay. It holds my money and makes payments on my behalf without, however, lending the money (this is not the case at the moment). I also pay a fee for the service.
Since, for a free market to exist, there must be protection of property, less than 100% reserve on demand deposits is fraud and is not compatible with a free market. That is, for a system of 100% coverage to exist, additional regulations are not needed, but protection of people's private property. This is currently not implemented by law.
The elimination of the Central Bank may increase the amount of reserves held by the CB, but is not a guarantee of reaching 100% coverage.
@Dimo Stefanov
"Since, for a free market to exist, there must be protection of property, less than 100% reserve requirement on demand deposits is fraud and is not compatible with a free market."
That's right. The bank supposedly only holds your money in an account, i.e. it's yours, but at the same time it lends it out (almost all of it). As you say - fraud. However, if this is legally established (as it is currently), then you can't call it fraud.
"Removing the Central Bank may increase the amount of reserves held by the CB, but is not a guarantee of reaching 100% coverage."
That's right. Before 1913, there was no central bank in the US, but banks operated with fractional reserves. In order to reach 100% reserves, it is necessary, in my opinion, that there is no monopoly on money, so that those who increase the amount of money the least win. Separately, it must be possible to keep track of when 100% coverage is promised in a contract, but is not (protection of property).
There will always be those who want to make a fractional reserve. The point is not to allow them to legally run wild. As far as I have read, fractional reserve has been around since ancient times. People who came to trade in a city would bring their gold (money) with them, but for convenience (so they wouldn't get robbed, for example), they would leave it with the local goldsmith. In exchange for the gold, they would receive a receipt that served as a substitute for money. That is, they could trade directly with it. However, the goldsmiths found that there was no problem in issuing more receipts than gold you had in stock. That is, if you are a goldsmith, you issue a fictitious receipt and buy, for example, a horse, food, etc. Pure fraud, you get something for nothing. However, at that time, when goldsmiths were caught doing such things, they were beaten. Nowadays, today's goldsmiths (banks) are protected by law. That is, theft is legalized.
@HER
"However, if this is legally established (as it is currently), then you can't call it fraud."
Nowadays there are many frauds that the law does not sanction, which does not make them any less frauds. That is the problem. The question is how to move from this state of affairs to the protection of private property. In the case of banks, for me a good start, as well as a feasible one at the moment, is to stop the stabilization policies and increase the monetary base.
@EE
"However, in the absence of regulations (in the Austrian sense), the full reserve system will prevail on the simple principle of competition."
I have strong doubts that this can happen. Even if the central banks were to be closed down by law tomorrow, the bankers would immediately create some kind of substitute (lender of last resort) and invent their own common money. That is, not only should you close the central banks, but you should also prohibit the bankers from creating associations, guarantee funds, etc.
Historically, regulations and barriers have mostly been imposed not by the state, but by various corporations. Our (Western) civilization is structured in such a way that the moment a group bites the bone, it immediately organizes itself into some kind of association (corporation) whose sole purpose is to put up barriers for new players.
There are as many examples in this regard as you want. Starting from the various certificates - for quality, for legal capacity, professional, etc. and ending with the recommended (in practice, mandatory if you want to work) memberships in various organizations (corporations).
In practice, modern industrial capitalism did not originate in free cities (with minimal state intervention), but in countries where the state itself limited the "freedoms" of medieval corporations.
"The issue is not allowing them to legally roam."
The law itself is a regulation, at the highest level.
Here's a little bit about the culture and history of Western society. Look, read, think, and try to connect it to modern times:
The Birth and End of Capitalism - A View from the Right - http://anthropologyreviews.com/?p=643
@Dimo Stefanov
"The question is how to move from this state to protecting private property."
If you leave the banks to their own devices right now (without a central bank, deposit protection, etc.), the system will implode. It is so unstable that it will collapse immediately. If you don't want a fantastic deflationary crisis, something has to be done.
Here's an example.
You see how much deposits there are in banks (they are always much less than the money in them), you print that much money (the Central Bank will print it) and distribute it to the banks according to their deposits, so that all the money in circulation is covered. Then you close the Central Bank, the printing press and all similar institutions. Some of the banks go bankrupt, others close themselves, and still others survive. However, there will be no deep crisis. And the reason is that the money in circulation remains the same, because it is physically available and cannot disappear, as deposits can disappear. At the moment, if the banking system explodes, wild deflation sets in (there is a lack of money, for example Cyprus) and the economy goes down the toilet. However, there is no way to get by without a crisis, since the economy will have to restructure. It will be used to a constantly increasing amount of money. After a while, this will happen, the speed of money circulation will decrease and stabilize and we will get out of the crisis. But as I said, this will be a minor crisis that cannot be avoided.
Ideally, you allow everything to be used as currency. Instantly, money transfers to gold begin and it becomes a means of payment. All government money loses any value because no one wants to use it. After gold, alternative and better currencies appear (see Bitcoin for example). With so many currencies, the economy ceases to be dependent on one currency and becomes much more stable.
So, in short, I imagine a controllable transition to full reserve. The chance of something like that happening, however, is more or less zero in my opinion. It is more likely that at some point the system will implode, we will go back to the Stone Age for a while, and then one or more new and stable monetary systems will come along.
@Toto5
"Even if central banks were to be closed by law tomorrow, the bankers would immediately create some kind of substitute (lender of last resort) and invent their own common money. That is, not only should you close central banks, but you should also prohibit bankers from creating associations, guarantee funds, etc."
That's what I'm explaining. You should be allowed to use whatever money you want. And no one should be able to stop you from doing it (by law or by force). Then they can make whatever associations, unions, etc. they want. This is irrelevant because there's no way to stop people from using their money.
"There are as many examples in this regard as you want. Starting from the various certificates - for quality, for legal capacity, professional, etc. and ending with the recommended (in practice, mandatory if you want to work) memberships in various organizations (corporations)"
The above things can only work if someone rules with violence and restricts you. For example, if you want to be a notary: you can't, because the state will put you in prison. But if the state can't? Then anyone can become one. Accordingly, prices will fall many times. Remove this regulation and there will be no problem.
"The law itself is regulation, at the highest level."
Yes, it regulates. The question is how far it should extend. That is, how much to regulate. The answer of the Austrian school is that the law should only protect the right to property and nothing more. That is, to punish: murder, theft, fraud, violence of any type, etc. And the reason is that these are necessary conditions for a market economy to exist.
I saw a mistake. Please in:
"..You see how much the deposits are in the banks (they are always much less than the money in them)"
to read "much MORE than the money in them".
@EE
Your suggestion is wrong.
First, the effect of the Central Bank printing and distributing money to CBs relative to deposits will lead to hyperinflation (CB assets will approximately double).
Second, it is wrong to distinguish between a banknote and a demand deposit, both of which are money substitutes. Mises has a perfect critique of the Currency School in both The Theory of Money and Credit and Human Action.
Third, there is nothing wrong with deflation. Neither the world will end, nor will we return to the Stone Age. On the contrary, deflation is the fastest way for price differences between different phases of production to recover, i.e. the natural rate of interest, showing people's time preferences. I recommend this lecture: http://www.youtube.com/watch?v=U9w0S9bEXIw the lecturer also has great articles on the topic. Let's not forget that the Austrian School considers depression as the time when the economy clears out bad investments, the more you postpone this time, the more severe the consequences.
Fourth, you probably got the velocity of money from here: "MxV=PxT". This is Fisher's equation and it is precisely it that has led to many erroneous economic conclusions. Starting from the fact that it is simply an obvious fact, written in mathematical symbols (in this case for one good) and nonsense using price indices, such as CPI (for many goods). In fact, V is not an independent quantity, although Fisher considers it relatively stable (all empirical analyses refute him). On the contrary, V= (PxT)/M; in mainstream mathematical models, V is related to r (the interest rate) through continuous compounding, but in these models, again re is a given quantity, not a result of human action, and as we know r actually expresses the time preferences of people in the economy.
@EU
"The above can only work if someone rules with violence and restricts you. For example, if you want to be a notary: you can't, because the state will put you in prison. But what if the state can't? Then anyone can become one. Accordingly, prices will fall many times. Remove this regulation and there will be no problem."
Read the article from the link I posted above. It describes things in the past, but the same thing is happening now. The restrictions imposed by various professional organizations, associations, etc. are much more extensive than the restrictions imposed by the state. In Bulgaria, our culture is relatively distant from typical Western corporatism and these restrictions are not felt in full force, but in the West they operate without an ounce of state interference. Although you formally have no restrictions from the state, if you are not a member of certain organizations, do not have some kind of certificate or are not registered in a certain register, in practice you cannot practice a bunch of professions. You have no formal ban, but no one hires you or gives you an order because you are outside the corporation and you want to be independent. Once you enter the guild, it starts to determine how to work, what "professional standards" you must adhere to, etc.
Remove the state and all these organizations will run wild with full force. Not only notaries, but also accountants, real estate agents, ordinary tour guides and a bunch of other professions will be subjected to monstrous "self-regulation". Corporatism has strong traditions and mechanisms to eliminate all competitors who do not want to join the pot and be independent. In the end, instead of competition and falling prices, you will get monopoly structures and neo-feudalism.
@Dimo Stefanov
“Since, for a free market to exist, there must be protection of property, less than 100% reserve requirement on demand deposits is fraud and is not compatible with a free market.”
This is not quite true. Money in demand deposits cannot be treated as property, but as an investment. After all, you do not pay the bank for the storage of your property, but you receive income (interest) from the investment you made. There is no option where investments are guaranteed and protected.
The problem is precisely this. Capitalism is directly related to private property, and today private property is practically absent from the large companies that dictate the rules. In them, property is not private, but corporate, there are no owners, only investors. The system is so distorted that you no longer have any interest in being an owner and you look to get rid of the property at the first opportunity and become an investor. Even in companies that are highly profitable and were private until recently, former founders and still directors are selling everything and running away from the property. If in the past, going public was for the purpose of attracting capital, expansion and a new beginning, now the same is seen as an opportunity to get rid of the property, to cash in and turn from an owner into an investor.
@Toto5
"This is not quite true. Money in term deposits cannot be treated as property, but as an investment. After all, you do not pay the bank for the storage of your property, but you receive income (interest) from the investment you made. There is no option where investments are guaranteed and protected."
Let's leave aside the fact that investment is property and the absolute truth that the value of any property is not guaranteed, but constantly changes according to consumer preferences. The problem is that even if individual A and commercial bank B freely agree to pay interest on the deposit, this is entirely at the expense of the CB, i.e. this is a separate issue from the topic of 100% reserve on deposits and it is wrong to mix them logically. Of course, the reason why the CB can afford to pay interest on demand deposits is precisely the presence of a fractional reserve, and the system is even easier if there is a CB that is a lender of last resort. And since I see that you are giving historical arguments (which you should be very careful with, because it is important how you interpret them), check at what point CBs start paying interest on demand deposits.
Your distinction between private and corporate property is wrong and is dictated by the misunderstanding that investment is property. On the contrary, investors perform the entrepreneurial function in society by assessing where to distribute their property. Both Mises and Rothbard treat this fallacy that you have fallen into and point out that the economy is built not on the managerial function, but precisely on the entrepreneurs-investors who assess where to invest resources, which production would best satisfy consumers. And because competition is a selective process, over time good investors remain, and bad ones are eliminated and replaced by others. It is absolutely subjective to judge that someone buying or selling assets is good or bad, economic analysis must be absolutely positive and abstract from the subjective assessment of the analyst.
@Dimo Stefanov
"First, the effect of the Central Bank printing and distributing money to banks relative to deposits will lead to hyperinflation"
How will it lead? If you keep the system with partial reserve - it can, but if you demand full reserve, it cannot happen.
For example: the state does the above and requires 100% coverage. At the same time, it does not allow other currencies to be used for payment (I do not support this option, I am just using it for the purposes of the discussion). There will be no reason for hyperinflation. Not that hyperinflation cannot occur at any time when the population is greedy for some reason, but there will be no economic reason for hyperinflation.
"Second, it is wrong to seek a difference between a banknote and a demand deposit, both of which are money substitutes."
There is a difference. The banknote cannot disappear, but the deposit can. If a bank with 100% reserves fails, it will be irrelevant to the banking system. The banks will be independent of each other. However, if a bank with 10% reserves fails, then money disappears and other banks start to fail in an avalanche.
I didn't understand what banknotes and deposits replace, do you mean gold? (the substitutes).
"Third, there is nothing wrong with deflation."
Well, it depends on which deflation, i.e. what and under what circumstances it was caused. If it is caused by growth - there is no problem.
"Neither the world will end, nor will we return to the Stone Age."
On the contrary, we will return to the Stone Age if all the banks go bankrupt at the same time or hyperinflation occurs. Money will disappear. And without money, trade becomes fantastically difficult and can only be conducted at a basic level. Entire crafts will disappear. Not to mention how long it will take to establish a new monetary unit with its associated price ratios between all levels of production (if it is not legally allowed to be paid in foreign currencies).
"On the contrary, deflation is the fastest way for price differences between different phases of production to be restored, i.e. the natural rate of interest, reflecting people's time preferences."
Here you talk about deflation as a natural process of recovery from the crisis. Companies and people have to restore their reduced liquidity, and from there the velocity of money in circulation decreases. And there I agree. However, the banking system works as a resonator of deflation, amplifies it (when it is with fractional reserve). And then it gets bad.
"This is the Fisher equation, and it is it that has led to many erroneous economic conclusions. Starting from the fact that it is simply an obvious fact, written in mathematical symbols (in this case for a commodity) ...."
Namely, this is an obvious fact written in mathematical symbols. However, I don't use it for calculations, that's the difference. As Nassim Taleb says, mathematics is a nice tool for thinking (not for calculations 🙂 )
"In fact, V is not an independent quantity..."
I agree with you. Velocity can only be derived when you know aggregate demand and the amount of money in circulation. Usually you don't know either of those, or you can't know them at all.
@Dimo Stefanov
"Your distinction between private and corporate ownership is wrong and is dictated by the misunderstanding that investment is property."
There is no such thing. The distinction is between property (regardless of whose it is) and investment. I'll quote you:
“Since, for a free market to exist, there must be protection of property, less than 100% reserve requirement on demand deposits is fraud and is not compatible with a free market.”
If you look at demand deposits as property, you are right. However, if you look at them as investments, the bank does not owe you anything. No one has ever argued that the basis of the free market is the protection of investments. On the contrary, bankruptcy and losses are a basic prerequisite for the existence of a free market. Formally speaking, the bank pays you (and not you to it) and in this case there is no room for alleged fraud. By receiving income, it is perfectly clear to you that the bank, in turn, has invested your funds (otherwise it would have nowhere to get money to pay you interest), and has not put them in jars, for example.
@Dimo Stefanov
"Both Mises and Rothbard address this fallacy you have fallen into and point out that the economy is built not on the managerial function, but precisely on the entrepreneurs-investors..."
Somewhere up until 30 years ago it was still like that. Today the economy is built by managers, and the main players are the various investment companies that manage foreign money. The same funds are investors everywhere
The old guns - the entrepreneur-investors - are disappearing. Instead, we now have only investors (without entrepreneurs) who prefer to diversify to the maximum extent and invest everywhere (most often by entrusting their money to be managed by professionals) instead of making judgments.
Look at Google and Facebook, for example. See who their major shareholders are and check where the money of their founders, who still work in their "own" companies, is invested. Here's some info based on the latest available data:
Facebook, Inc. - ZUCKERBERG MARK - Shares - 164
Google Inc. - PAGE LAWRENCE - Shares - 85,000
Google Inc. - PAGE LAWRENCE - Shares - 3,230
If Mises and Rothbard were right, then today, based on this data, we would judge that the above assessment of Facebook and Google, respectively, is extremely negative (they are insiders after all) and therefore they have practically no investments in them. In fact, the world has changed and no one pays attention to such things.
Whether this is better or worse I don't presume to judge. The fact is that it is different.
@Toto5
"Although you formally have no restrictions from the state, if you are not a member of certain organizations, do not have some kind of certificate, or are not registered in a certain register, in practice you cannot practice a bunch of professions."
There is nothing wrong with the above. The market needs certainty and seeks it through market mechanisms. I would not want an unqualified doctor to operate on me, and his presence in a reputable organization is for me a sure assurance that he has a certain qualification.
However: When these organizations are not made by the state (i.e. without violence) they can be thrown out, replaced, changed or simply ignored at any time. A novice doctor, for example, could offer a life-saving and very complex and expensive operation for zero money, just to gain experience. With a state organization of the matter, this sick person has no other choice but to die or hope for mercy.
"Remove the state and all these organizations will run wild."
"Ultimately, instead of competition and falling prices, you will get monopoly structures and neo-feudalism."
You can't just get a monopoly. If you raise prices, the profits will be very high and there will be many people who want to profit. When they become enough, there is nothing stopping them from organizing a new organization, for example, or simply not complying with the current one. The latter will be possible because customers will want the same thing. Why pay three times more for something when you can get it for less, albeit with a slightly increased risk.
Monopoly is closely related to violence, i.e. with limiting the individual's ability to act, to organize. When violence is absent, it is very difficult to achieve monopoly (there is an exception, the so-called natural, meaning monopoly established only through market mechanisms).
"Money in demand deposits cannot be treated as property, but as an investment. After all, you do not pay the bank for the storage of your property, but you receive income (interest) from the investment you made."
What Dimo Stefanov explains is that with a 100% reserve, not only will you not receive money from the bank as interest when you have a term deposit, but you will also have to pay fees. And the reason is that this will not be an investment (the bank will not have the right to touch them), but a service. You pay for the services.
@Toto5
"If you look at demand deposits as property, you're right. If you look at them as investments, however, the bank doesn't owe you anything. No one has ever argued that the foundation of the free market is the protection of investments."
The problem is that demand deposits are not made for investments and do not claim to be such. When you want investments, you choose a term deposit. By using a demand deposit, you automatically say that you want this money to be available to you in full, at any time and unconditionally (not depending on whether other people want to withdraw their money). This is exactly what banks violate. The violation is not legal, however. The moment you establish by law that theft is permitted, it becomes legal and you have no right to call it theft. However, this does not make it any less theft.
@EU
"The problem is that demand deposits are not made for investments and do not claim to be such. When you want investments, you choose a term deposit. By using a demand deposit, you automatically say that you want all of this money to be available to you, at any time, and unconditionally."
And by agreeing to receive income, you automatically allow the bank to invest it. You still have a choice - put your money in a safe, buy diamonds or gold and also put it in a safe and it will not be touched.
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@Toto5
There is ownership and non-ownership; there is investment and consumption (with an unchanged cash balance). You mix up the definitions and from there your entire logical construction collapses. I have explained everything else above.
@EE
The fact that you can touch a banknote and a deposit cannot does not make the deposit any less real and the banknote any more real. Economists are interested in content, not form. They are substitutes for the accepted medium of exchange, which may be a commodity, credit money, fiat money. I use Mises' terminology, Salerno has a good article showing some misconceptions among Austrians about this terminology.
There will be hyperinflation 🙂 ; what will happen to the doubled balance of the Central Bank 🙂 . and to all the loans given out.
On the issue of deflation, I have said what I think, see also Hulsman's lecture. We will reach the Stone Age faster with hyperinflation (which will happen if the Central Bank doubles the balance of the Treasury) than with deflation. On the issue of the quantity equation, I have also written above, you cannot derive any information from it (I mean this with an obvious fact).
@Toto5
"And by agreeing to receive income, you automatically authorize the bank to invest it."
The situation is much more complicated. The bank invests them and for that it gives me interest income from them (quite low). And it doesn't ask me if I want to invest them. If I only want to use it for a service, i.e. to keep my money and pay cashless, then I don't have that option. I'm not going to make an investment. I would be very happy if companies popped up that would offer me exactly such a service: to manage my payments for a small fee. However, there's no chance. This would be a full-reserve system and banking activity in general and as such falls under the regulation of the BNB, which means it wouldn't be allowed. And secondly, with guaranteed interest income in banks, how can such institutions compete with them? Especially since the state PROMISED you (!) that your money in banks is safe. No chance.
The bank and the laws de facto say the following: You can simultaneously have your money available and invest. That is, both the wolf is full and the lamb is whole or in English "to have your cake and to eat it too". It is clear that there is no way that some money can be both invested somewhere and available, but that is exactly what banks claim to do, AND PROMISE! This is the problem, that they lie, and that they are legally protected against this lie.
"You still have a choice - put your money in a safe, buy diamonds or gold and put them in a safe too and they won't be touched."
When my money is in a vault, it is not available and I cannot use it, either directly or for cashless payments (a great convenience). If I buy diamonds or gold, I become illiquid (this is not money).
By the way, here's the problem from another perspective.
Through fractional reserve banking, banks create money that did not previously exist in the economy. However, this new money is not backed by new goods and/or services. De facto, the bank is in the position of a counterfeiter who has created a new banknote and bought something with it. Counterfeiting, as you know, is punishable, and for good reason, namely, that you are stealing. For a piece of paper, you are buying people's labor. Very simple: I write a few things on a piece of paper and buy a skyscraper.
Banks do exactly the above. The difference is that they are allowed to do it legally. The state is de facto two-faced: it forbids people from doing something bad, which it is allowed to do.
By the way, that's exactly why we have inflation. That's why inflation is theft.
@Dimo Stefanov
"The fact that you can touch the banknote and the deposit cannot does not make the deposit less real and the banknote more real. Economists are interested in content, not form."
The above is very general and vague. Honestly, I don't think we'll get stuck.
"They are substitutes for the accepted medium of exchange, which can be a commodity, credit money, fiat money."
What is this medium of exchange in the modern economy? Am I to understand (strangely) that banknotes are substitutes for fiat money. If banknotes are substitutes for this money, then where and what is the money itself?
"There will be hyperinflation; what will happen to the doubled balance of the Central Bank... and to all the loans given out."
Well, what will happen in the situation I described (legally imposed 100% reserve, ban on other currencies) is that some loans will not be returned, others will be returned, etc. Basically nothing. Some banks will cease to be banks, others will continue to operate. As I said, money will not be able to increase (the requirement is for 100% reserve). How will inflation occur when money does not increase? And during a crisis, i.e. a decrease in the velocity of money in circulation. And there will definitely be a crisis because the economy will have to restructure.
By the way, the above is just a variation of J. Reisman's description of how to get to full reserves. He wants the above, but 100% of the reserves to be in gold. That is, to fill the banks with gold at a certain exchange rate, that is, to cover their deposits with gold.
"We will reach the Stone Age faster with hyperinflation (which will happen if the Central Bank doubles the balance of the Treasury) than with deflation."
I agree. In hyperinflation, money is practically discarded entirely, it practically does not exist. In deflation, it at least exists.
By the way, I should say that I am extremely pleased to talk to someone who has clearly read more and is more interested in Austrian economic theory than I am.
@EE
The first question is very good. Here is Salerno's article http://www.mises.org/journals/rae/pdf/rae8_1_4.pdf. In it you will find the answer to the question, which is too long to explain in a forum. Mises himself was very skeptical about the existence of fiat money, if we strictly follow his terminology. He is skeptical in both "Money and Credit" and "Human Action". According to him, in the modern economy, money is credit, i.e. it can regress to a point where banks refuse to pay out the required amount of commodity money and pay out less. This also makes the topic of fiat money very interesting.
For hyperinflation, I will try to explain with an example. Let a bank operate on fractional reserve and use 50% of its deposits for loans, let the deposits be $1000, therefore the loans are for $500. The interest rate for 1 year - 10%; In 1 year the bank makes a profit of $50, which it can use as it sees fit.
If the Central Bank covers all uncovered deposits, i.e. $500, then at the end of the year the CB will have a profit of $550, which it will use as it sees fit.
As you can see in the second case, the marginal utility of the cash balance decreases and the central bank will one way or another bid for resources in the economy (or its customers). This is an increase in the money supply, i.e. inflation.
I haven't read Reisman's, but I think it's about something completely different. The Central Bank should stop printing money, start acquiring only gold as its asset, and at some point fix the exchange rate and perform the function of a warehouse. Mises has a similar proposal in the additional chapter to "The Theory of Money and Credit". This will stop the increase in the monetary base, but it will not stop operating with a fractional reserve, it will still significantly limit the Central Bank in creating circulating credit.
@Dimo Stefanov
"Here is Salerno's article http://www.mises.org/journals/rae/pdf/rae8_1_4.pdf. In it you will find the answer to the question, which is too long to explain in a forum."
How to put it more subtly. I'm on the forum to talk to people, not to read articles. In short, I'm interested in your opinion, not what Mises or anyone else wrote.
Regarding fiat money. I do not agree with Mises. Fiat money means unsecured money, i.e. money that is not backed by anything valuable like gold, silver, etc. There is no problem with money being fiat if it does not increase. None at all. This thing about collateralizing with gold (for example) is also a bad thing (but much better than anything tried so far). Not to mention the enormous and unproductive labor of extracting something that we can then stick in a bank vault instead of using it for cheap integrated circuits or even for wires (silver). During the conquest of the Americas, there was also inflation due to the gold entering Europe. It was a lot and significantly outpaced the growth of the economy (as far as the comments I read can be relied on).
Regarding your example of hyperinflation. I'm not sure I understand it. Should I understand the following: Depositors have put 1000 leva in the bank as deposits, and the bank has given 500 of them as loans. And on these 500 leva it has received interest from loans of 50 leva. Is that right? And from these 50 leva it has to pay interest to its depositors and generate profit?
"As you can see in the second case, the marginal utility of the cash balance decreases and the CB will in one way or another bid for resources in the economy (or its customers). This is an increase in the money supply, i.e. inflation."
This concept of "marginal utility of the cash balance" doesn't mean anything to me. I also don't understand what it means that the Central Bank will bid for resources from the economy. And the money supply cannot increase because there is simply nowhere to get new money, and there is nowhere to get it because the system is already (after covering deposits with money) with 100% reserves, and there is no Central Bank that prints money. There is no inflation.
"I haven't read this by Raisman, but I think it's about something completely different."
It's not possible. It's about how to move to a gold standard with 100% reserves and no central bank without ruining the economy in the meantime.
@EE
Whoever wants to reads, whoever doesn't want to doesn't.
Fiat money - money imposed by decree of the state. This is not the case with gold. Its extraction is a business like any other and how many resources will be directed to it depends on the return on the activity, the "unproductive labor" in question is a myth. The very qualification "unproductive" is a subjective assessment; for example, for me, cigarettes have no value, but this does not mean that we should close cigarette factories because for me they are unproductive. I am against fiat money because it is imposed by force, which is a violation of my private property and does not give me the opportunity to use other money. I am against central banks constantly changing the value of my money, through fake money substitutes. I cannot explain this better about inflation. Like all goods, the money we hold at a given time has a marginal utility, when the marginal utility of money is lower than that of a given good, the individual is ready to exchange money for the good and vice versa.
@Dimo Stefanov
"That's not the case with gold."
It is true that it is not imposed by force. However, that does not make it ideal money.
"Its profit is a business like any other and how much resources will be directed to it depends on the return on the activity, the "unproductive labor" in question is a myth. The very qualification "unproductive" is a subjective assessment; for example, for me cigarettes have no value, but that does not mean that we should close cigarette factories because for me they are unproductive."
Let's see if labor is productive. So the Austrian school itself claims that labor is meaningless if it does not produce goods useful for the market. That is, digging and burying a hole is labor, but meaningless and unproductive from the market point of view.
Now let's ask ourselves the question: How much money does an economy need to function? Let's talk about gold. The answer is: it doesn't matter how much, as long as it doesn't increase. Because that leads to inflation and, generally speaking, is theft. Good, but gold is increasing. There are mining companies that mine gold. That is, this is bad in itself. However, the Austrians claim that behind this gold there is hard work and that is why the new gold is not equal to newly printed fiat money. So far so good. However: what do we use the new gold for: 90-95% for monetary purposes. That is, it sits in some safe and gets moldy. Do we use it for something useful? We cannot use it well because due to the fact that it has monetary use, its price is high and for this reason it cannot be widely used in the economy. That is, we have produced something that we DO NOT USE to make our lives better (monetary gold is not eaten, drunk, dressed, worn as jewelry, etc.). If this gold and silver were used for non-monetary purposes (for example, for electrical conductors), then our lives would indeed be better, because the labor of extracting it would directly benefit us. Right now we are producing something that we can easily do without. Or maybe you think that if the gold to be extracted runs out now, then a gold standard economy could not exist? That is, that money should increase?
In short: while in the production of fiat money there is de facto no labor (paper money costs fractions of a cent, and computer money is practically free), in the production of gold there is a boiling 90% - meaningless labor, even counterproductive (new money enters the economy and unbalances it).
Even more briefly: Not only is there no benefit from the new monetary gold, but there is a loss. Therefore, gold is not ideal money, as Mises apparently imagines it to be.
For the market to choose something for money, that thing must be suitable for that purpose. From experience, the following criteria have been defined for something to be suitable for money:
1. Have a large value in a small volume to be convenient for carrying value (gold, silver, platinum)
2. Be durable (i.e., not rust, not decompose, etc.).
3. They must be divisible (you cannot divide a cow into parts).
4. They should be homogeneous, i.e. one pair should always be equal to the other, so that they are interchangeable and you don't care which pair you work with. This is why diamonds are not used as money, but cigarettes generally are and have been used as money in prisons and among soldiers in the army.
And the fifth requirement that I disagree with, but you would support, is:
5. There should be something behind the money, i.e. it should be commodity money.
But why do we want something behind them? The answer is: so that they cannot be created with a single tap on the computer keyboard, i.e. so that they do not increase. In this sense, current money is constantly increasing, and this is bad.
However: if we can guarantee that money will not increase in any other way (for example, through competition between different currencies), then what does it matter that there is something behind the money? None!
For this reason, I argue that the demand for commodity money is wrong, bad (see the use of gold), and unnecessary.
This point should read:
5. Money, no matter how much, should be a constant.
Do you want me to tell you which money comes closest to the above ideal?
In my opinion, Bitcoin. There is only one problem there, namely that the creators have made sure that this money can also be mined, namely by solving mathematical problems of enormous complexity requiring supercomputers. The latter is, as with gold, absolutely meaningless and unproductive labor. Even harmful.
However, take away this opportunity from Bitcoin and you have the perfect money.
Points 1 to 5 are automatically fulfilled. Do you care that there is no gold behind them when they are constant?
Would such a Bitcoin be better money than gold? Definitely yes. Gold could not compete with it. We create such money and forget forever to deal with money anymore. We created it for zero money, and we have put all our efforts into producing goods and services that improve our lives. Why waste ourselves on PRODUCING MONEY?!
I forgot to say that in order to work with a gold standard, we have to spend resources just to store and protect the gold. That is, the gold standard requires maintenance. It is necessary to have vaults, someone to guard them, etc. That is, we are again wasting the economy's resources on nonsense. With Bitcoin, this would not be the case, or if there are any costs, they would be exactly tiny (like the costs for the Central Bank when they click their finger on the computer key to issue the next million dollars).
I have never said anywhere that gold is the ideal of money. The competition of different means of exchange, without violating private property, is the optimum. The gold standard does not mean the use of gold for money, but rather the competition between moneys, and in this sense this term was used by the Austrians.
The Austrian School of Economics does not say that "labor is meaningless if it does not produce goods useful to the market." There is no such market unit that thinks and acts. The Austrian School says that value is subjective, "in the eyes of the individual." So whoever wants to mine gold, let him mine it, and we have no right to violate the right to his labor just because we think it is unproductive.
This doesn't matter to Bitcoin, in this line of thought. If it's a better solution than gold and the current system, it will become money (because it hasn't yet), if not, it won't.
In this line of thought, the Austrian School is not against the increase in the money supply dictated by the market, but it is against government regulation because it violates private property. In fact, the Austrian School is not "FOR" or "AGAINST" anything. It derives logical laws and shows the consequences of one action or another. You can be absolutely aware of the Austrian School, but be a mean politician who wants to make the people around you poorer and more miserable.
@Dimo Stefanov
"I have never said anywhere that gold is the ideal of money. Competition between different means of exchange, without violating private property, is the optimum."
Sorry, you didn't say it, but Mises supports this system as far as I've read. Am I to understand that you also think Mises is wrong?
"The Austrian School of Economics does not say that "labor is meaningless if it does not produce goods useful to the market." There is no such market unit that thinks and acts."
Am I to understand that in your opinion, digging and burying a hole is productive labor?
"So whoever wants to mine gold, let them mine, and we have no right to violate their right to labor just because we think it's unproductive."
I never meant to forbid people from mining gold whenever they want. I'm pointing out that the gold standard won't solve all the problems. And that those who push for it have a wrong idea of what it is. It has the same problems as the current fiat standard, but much smaller ones. I'm just saying this: Gold is better money, but not the best.
"This doesn't matter to Bitcoin, in this line of thought. If it's a better solution than gold and the current system, it will become money (because it hasn't yet), if not, it won't."
I believe that a better system than the gold standard would have existed a long time ago if governments had withdrawn from controlling money. Gold initially had no alternative, it was the most suitable for money. Then paper money appeared. Even with it alone and without any internet, an ideal system could be made (100% reserve and no new money), but this was never allowed because the state never let go of control. Now with the internet, cryptographic algorithms, etc., we have even better money than paper money. I expect them to ban it soon. And I see that they are already pushing.
"In this line of thought, the Austrian School is not against market-driven increases in the money supply, but it is against government regulation because it infringes on private property."
And it should be, because printing new money or offering gold money but without new goods to exchange for it is de facto theft. In both cases, the purchasing power of people who do not receive the new money or receive it later is diluted. Not to mention that the new money (gold or not) distorts the economy. And from there - crises.
In short: It is hypocritical to be in favor of increasing gold money but not fiat money. However, even George Reisman does it (I disagree with him of course).
And as I told you above, there have been cases of "gold" inflation. And what will we do in the future if a large gold deposit is found or if we find a way to transform it cheaply?